"THE PARTIES CANNOT CREATE SOMETHING WHICH HAS EVERY FEATURE OF THE ROOSTER, BUT CALL IT A DUCK AND INSIST THAT EVERYBODY ELSE RECOGNISE IT AS A DUCK."
Recent decisions of the Federal Court and Fair Work Australia have clarified the test that is applied to determine whether a worker is an employee or a contractor. These decisions have found that persons who had, for some time, been engaged as independent contractors were employees. Coupled with the increasing vigilance of regulators to stamp out the practice of sham contracting, these developments have put companies on notice that their independent contracting arrangements may be the subject of scrutiny.
It is essential, therefore, for companies to review their work arrangements with independent contractors and seriously consider converting independent contracting arrangements to employment arrangements in doubtful or marginal cases and, of course, in cases where the work relationship is clearly an employment relationship.
THE FUNDAMENTAL QUESTION
Recent Federal Court and Fair Work Australia decisions have posed a fundamental question to be answered to determine if a person providing services is properly categorised as an independent contractor or an employee.
In essence, the question is whether the person providing the services is in business on their own account and, when providing the services, is the person working in their own business and not in the business of either the party receiving the services or the party on whose behalf the services are being performed.
The first part of the question asks whether the person has a business, and the second part asks whether the work being performed by the person is being performed in and for the business of that person, or in and for the business of someone else.
The question is answered by looking at the totality of the work relationship and by examining how the relationship operates in practice against various criteria. The outcome of this exercise should shed light on whether the person providing the services is an independent contractor or an employee.
"A genuine independent contractor providing personal services will typically be autonomous rather than subservient in its decision making; financially self reliant rather than economically dependent upon the business of another and chasing profit rather than simply a payment for the time, skill and effort provided."
Bromberg J in On Call Interpreters v Commissioner of Taxation (No 3)  FCA 366
THE CRITERIA TO BE EXAMINED
The criteria to be examined in order to answer this fundamental question are many and varied, have been analysed in a number of court and tribunal cases and include the following:
- Goodwill - when providing the services, does the person generate goodwill in their own business, or in the business of another?
- A going concern - coupled with goodwill, does the business have value beyond its physical assets as well as other intangibles such as a name, brand and reputation?
- Risk - does the person face a risk of loss or profit when providing the services?
- Reward - is the person aspiring to make profits or is the person performing the services simply being paid remuneration, as would an employee? Also, to what extent is payment for the services negotiable and negotiated commercially?
- Control - who controls and directs, or has the capacity to do so, the manner in which the services are performed? The greater the degree of control exercised over the person performing the services, the greater the likelihood that the work relationship is an employment relationship.
- Delegation - is there capacity to delegate the performance of the services?
- Integration - is the contractor separate to the business, like an accessory, or is the person performing the services fully integrated into the business receiving the services? Integration may be evidenced by the person's name appearing on an internal telephone directory, the person having a company email address or the person providing the services being paid out of the payroll department rather than the finance department.
- Liability - to what extent is the person performing the services exposed to the risk of commercial loss and liability for poor quality work or injuries? Does the person take out insurance cover against these risks? For example, an employee will suffer little or no commercial risk for loss resulting from poor workmanship. The employee will still get paid his or her wages whereas a contractor may not be paid. The possible risk an employee faces for unsatisfactory performance is disciplinary action, including dismissal.
- Result - to what extent is the agreed payment contingent upon the person providing a satisfactory result? Are there financial consequences for poor performance? Is the outcome of the engagement to achieve a specific result or to undertake a specific task?
- Staff - does the business employ or engage persons other that the owner/operator to perform the services? Is the person free to employ his or her own means (employees or contracted agents) to provide the services, or must that person personally perform all the work?
- Promotion - is the business promoted as a business to the public through advertising or other promotional means? For example, does the person advertise their services in the Yellow Pages, trade publications or via their own website? Do they have their own business cards?
- Assets - does the business have assets, either premises or equipment, which are used to support its activities?
- Business systems - does the person use basic transactional systems and arrangements for invoicing, standard rates and terms and conditions of trade, insurance coverage, payment and debt collection, appropriate financial records and business-based banking/financial arrangements for their business?
- Regulatory requirements - does the business meet its regulatory requirements, such as business name, Goods and Services Tax and Australian Business Number registration and compliance?
- Expenses - are expenses paid from remuneration received?
- Services - are the services provided in a profession, trade or distinct calling?
- Characterisation of the relationship - have the parties expressly stated the nature of the work relationship (ie as principal/independent contractor)?
- Terms and conditions - what are the terms and conditions afforded to the person performing the services? Do they include terms and conditions usually associated with employment (eg withholding of tax, entitlements to paid leave and the like)?
- Uniform/identification - is the person providing the services required to wear uniforms or identification badges of the company receiving the services or the company on whose behalf the services are being provided?
- Incorporation - is the business incorporated? Note that this alone will not be sufficient to establish an independent contracting relationship. If all other factors point to an employment relationship, the fact of incorporation will be given very little weight. There have been cases where the courts have been prepared to look behind the fact of incorporation to determine the true nature of the work relationship.
APPLICATION OF THE CRITERIA
Sometimes it is not easy to be clear about the true nature of particular work arrangements.
The process has been labelled by one judge as the "elephant test" - an animal that is too difficult to define, but easy to recognise when you see it. Another judge suggested that the process of applying the criteria involved what he described as the "smell test", or relying on a level of intuition.
Applying the criteria to the particular circumstances of a work relationship is not a simple matter of drawing up a checklist, ticking boxes and assuming that if there are more ticks in the contractor box than the employee box, then the person performing the services is a contractor.
One of the reasons for this is that a court may consider some criteria more useful than others in determining the nature of the work arrangements. Depending on the nature of the matter before the court or tribunal, different weight or importance might be given to some criteria over others.
In line with the title of this article, the manner in which the parties describe the relationship in any written agreement will be important. However, it has been held in a number of cases that parties cannot alter the true nature of their work relationship by putting a different label on it. In other words, the parties cannot deem the work relationship between themselves to be something it is not. However, if a court has considered all other matters relevant to the work relationship, and the court or tribunal considers the relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity by identifying the nature of the relationship in a written agreement.
The consequences of a person engaged as an independent contractor being found to be an employee can be far reaching, and quite expensive for the principal found to be the employer.
For example, a contractor whose services have been terminated may be found to be covered by the unfair dismissal provisions, if the person is later found to be an employee. Also, the company may be found to be liable to make superannuation contributions on behalf of the person or to remit to the Australian Taxation Office an amount for tax, which the company should have withheld from the payments made to the person. Further, if found to be an employee, the person may have claims for payment of employment entitlements such as accrued annual leave, personal/carer's leave (if, for example, the person was absent because they were sick and not otherwise paid because they were not providing services on that day), allowances, penalty rates or overtime. In a recent decision, a company was ordered to pay upwards of $500,000 for accrued annual leave to five sales representatives found to be employees, not independent contractors.
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